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On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector

Dubois, Pierre and Sæthre, Morten (2020) On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector. Econometrica. (In Press)

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Differences in regulated pharmaceutical prices within the European Economic Area create arbitrage opportunities that pharmacy retailers can access through parallel imports. For prescription drugs under patent, parallel trade affects the sharing of profits among an innovating pharmaceutical company, retailers, and parallel traders. We develop a structural model of demand and supply in which retailers can choose the set of goods to sell, thus foreclosing consumers’ access to less profitable drugs. This allows retailers to bargain and obtain lower wholesale prices from the manufacturer and parallel trader. With detailed transaction data from Norway, we identify a demand model with unobserved choice sets using retailside conditions for optimal assortment decisions of pharmacies. We find that retailer incentives play a significant role in fostering parallel trade penetration and that banning parallel imports would benefit manufacturers as well as prevent pharmacies from foreclosing the manufacturer’s product. Finally, in the case of the statin market in Norway, we show that it would be possible to decrease spending and increase profits of the original manufacturer through lump sum transfers associated with a lower reimbursement price, thus decreasing price differentiation across countries.

Item Type: Article
Language: English
Date: 2020
Refereed: Yes
Uncontrolled Keywords: Parallel trade, pharmaceuticals, vertical contracts, demand estimation, foreclosure
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 17 Jun 2020 08:11
Last Modified: 17 Jun 2020 08:11
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